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ZNR UUUUU ZZH
R 212210Z MAY 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 5984
INFO RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHCN/AMCONSUL CHENGDU 6296
RUEHGZ/AMCONSUL GUANGZHOU 0524
RUEHGH/AMCONSUL SHANGHAI 4603
RUEHSH/AMCONSUL SHENYANG 6109
RUEHHK/AMCONSUL HONG KONG 7411
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RUEHGV/USMISSION GENEVA 1078

UNCLAS SECTION 01 OF 08 BEIJING 009677 
 
SIPDIS 
 
DEPARTMENT FOR EAP/CM, DRL/IL 
DEPARTMENT PASS USTR FOR KARESH, ROSENBERG 
DEPARTMENT PASS USTR FOR STRATFORD, WINTER, ALTBACH, CELICO 
LABOR FOR ILAB NEWTON, LI ZHAO, SCHOEPFLE 
TREASURY FOR OASIA/ISA-DOHNER AND KOEPKE 
USDOC FOR 4420/ITA/MAC/MCQUEEN 
GENEVA FOR CHAMBERLIN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ELAB ETRD PHUM PGOV CH
SUBJECT:  Will Draft Labor Contract Law Improve Conditions 
for Workers? 
 
Ref:  A) Guangzhou 10741 B) Beijing 01355 C) Beijing 01153 
 
D) 05 Beijing 10998  E) 05 Beijing 09446  F) 04 Beijing 
19514 
 
Sensitive But Unclassified; Handle Accordingly 
 
¶1. (SBU) Summary:  The draft Labor Contract Law (LCL), 
considered by the National People's Congress (NPC) at its 
March session and published for comment through April 20 by 
the NPC Standing Committee, gives workers increased 
protections by providing fixed-term contract protections 
for workers whose employers fail to provide a written 
contract, by regulating Labor Service Agencies (LSAs) that 
provide employers with temporary workers, and by increasing 
penalties for employer violations of workers rights, such 
as failure to pay wages, defaults by unlicensed companies 
and LSAs on wages, use of illegal guarantees by employers, 
use by employers of violence, coercion and force against 
workers, and abuse of authority by labor bureaus.  Although 
the draft adds new protections for workers and gives labor 
bureaus stronger penalties to use to deter employer abuses, 
the draft cannot resolve the longstanding problems that are 
clearly the biggest barriers to improved working conditions 
in China: inadequate numbers of labor inspectors in the 
labor bureaus; the failure of local governments, wed to a 
development model premised on cheap labor and steeped in 
local protectionism, to enforce the law; and the 
unwillingness, or inability, of the central government to 
force lower levels of government to enforce the law.  End 
Summary. 
 
¶2.  (U)  The Labor Contract Law of the People's Republic of 
China (LCL), considered by the National People's Congress 
(NPC) during its March session and published by the 
Standing Committee of the NPC for a one-month comment 
period on March 20, has generated significant controversy. 
While reportedly the bulk of the more than 80,000 comments 
received by the NPC as of April 14 are from workers 
supporting the draft, employers are rallying to point out 
problems with the proposed law.  Laboff's analysis below is 
informed by review of comments published by law firms, 
review of submissions by companies to the NPC and by 
interviews with labor law professors and attorneys. 
 
Core Change:  Protection for Workers Without Contracts 
--------------------------------------------- --------- 
 
¶3.  (U) One of the most significant changes in the law is 
the inclusion of statutory protections for workers who do 
not have employment contracts.  Draft Article 9 provides 
that all labor contracts shall be in writing, but also 
provides that where there is an actual labor relationship 
between an employer and employee without a labor contract, 
the employer and employee shall be deemed to have concluded 
a non-fixed term contract.  Article 9 also specifies that 
if the employer and employee differ as to whether there is 
an employment relationship, the employee's view is to 
prevail, unless evidence to the contrary is provided. 
Article 10 provides that when there is no contract, the 
date the employee renders service to the employer is the 
day the employment relationship is established.  (See also 
Paragraph 8:  Penalties for Employer's Failure to Provide a 
Labor Contract.) 
 
¶4.  (U) Articles 9 and 10 protect workers whose employers 
fail to sign employment contracts with their employees, or 
who sign contracts that do not comply with the law.  The 
December 2005 Report to the Standing Committee of the 
National People's Congress (NPC) on the Implementation of 
the 1994 Labor Law documented the continuing problem of 
employers who fail to sign contracts with their employees. 
Surveys and other investigations showed that fewer than 20 
percent of employees in small/medium-sized non-public-owned 
 
BEIJING 00009677  002 OF 008 
 
 
enterprises have signed labor contracts with their 
employers.  The Report also identified contracts that give 
employers rights but employees only obligations, that 
provide no specifics as to employee salary, that contain 
provisions exonerating the company from liability for 
accidents, and that have not been negotiated with the 
employee as a continuing problem.  Transasia Lawyers, an 
international law firm, said in its March 31 Employment Law 
Newsletter: "The unwillingness of many employers to sign 
contracts is driven by their desire to drive down labor 
costs.  In the absence of a formal employment relationship, 
unscrupulous employers not only avoid having to contribute 
to the various mandatory social insurance schemes on behalf 
of their undocumented workers, but also dodge their 
liability to pay workers monetary compensation for early 
termination." 
 
Core Change:  Regulation of Labor Service Agents 
--------------------------------------------- --- 
 
¶5.  (U) The draft LCL for the first time regulates Labor 
Service Agents (LSA; also known as Labor Dispatch 
Agencies).  The law defines these agents as employers 
engaged in providing human resource services by assigning 
workers for employment in other companies.  Article 12 of 
the draft LCL requires that an LSA must have registered 
capital of RMB 50,000 (USD 6,250), and must maintain a 
reserve fund of RMB 5,000 per assigned worker as a 
guarantee that the assigned worker will receive wages. 
The article also requires that the LSA have a contract with 
the assigned workers, which contract sets out the name of 
the company accepting the assigned workers, and includes 
the term of employment and job description, in addition to 
the contract terms required by Article 11.  Article 12 
makes the LSA responsible for supervising the company 
accepting the assigned workers, and for assuring their 
compliance with labor standards and labor conditions.  LSAs 
are required to enter into labor force assigning contracts 
with the companies receiving assigned workers, and are also 
required to inform workers of the contents of these 
agreements. 
 
¶6.  (U) Transasia Lawyers, in its March 31 newsletter, 
describes the problems regulation of LSAs is intended to 
remedy: " ... Some employers recruit through an (LSA) as a 
means of avoiding their lawful obligations towards staff. 
In some cases, an employer has dispatched its employees to 
an (LSA) in order for them to be seconded back to their 
original positions with that same employer.  By changing 
the nature of the employment relationship, the employer is 
able to circumvent various obligations that it would 
otherwise have toward such personnel in terms of wages, 
benefits and other entitlements.  Some employers have 
simply terminated employees in order to replace them with 
alternative staff seconded by an (LSA).  Other cases 
involve irregular employment practices by newly established 
(LSAs), such as the unlawful deduction of so-called 
"management fees" from employees' wages and failure to pay 
social insurance contributions on behalf of employees.  In 
the interests of profit, some employers turn a blind eye 
when (LSAs) sign contracts with employees that clearly 
violate employees' legal rights.  For their part, some 
(LSAs) are unconcerned when employers fail to provide 
adequate safety measures for their secondees, deprive 
secondees of their lawful entitlement to rest periods and 
holidays, or violate their rights in other serious ways." 
(Note:  See also Paragraph 7: Violations by Labor Service 
Agencies.)  Large LSAs, such as FESCO, the Foreign 
Enterprise Service Corporation, reportedly contend that the 
capitalization requirements will be unduly burdensome. 
 
Core Change: Increased Penalties 
-------------------------------- 
 
BEIJING 00009677  003 OF 008 
 
 
 
¶7. (U) The December 2005 Report to the Standing Committee 
of the NPC on the Implementation of the 1994 Labor Law 
notes the inadequacy of Labor Law enforcement capability by 
the local labor bureaus, which have insufficient employees 
in general, have insufficient employees and mechanisms 
dedicated to preventing problems, and can only handle 
complaints that are filed.  Where complaints are filed, the 
Report said, the labor inspection units do not have 
punitive measures sufficiently powerful to deter employers. 
To address the latter problem, the drafters provided for 
significant increases in civil penalties on certain 
prohibited practices, and added references to criminal 
penalties for some prohibited practices as well. 
 
--  Failure to Pay Wages or Other Economic Compensation: 
Draft Article 55 provides that if an employer fails to pay 
wages as required under the contract, fails to pay the 
minimum wage, or fails to pay other economic compensation 
as provided by law, the labor protection authority can 
order the employer to pay within a stipulated time.  If the 
employer does not pay within that time period, the labor 
protection authority shall order the employer to pay the 
employee an additional 50 - 100 percent of the amount due. 
Article 55 of the draft increases by 25-75 percent current 
penalties on violations of the wage laws.  Currently, the 
Rules on Economic Compensation for Violating or Terminating 
Labor Contracts, effective January 1, 1995 provide that for 
failing to pay wages in a timely fashion or for making 
illegal deductions from wages, the employer shall pay the 
unpaid portion plus an additional 25 percent of the unpaid 
amount (Rules, Article 3); for paying a wage below the 
minimum wage, the employer shall pay the insufficient 
portion plus an additional 25 percent of the insufficient 
portion (Rules, Article 4); and for not paying the employee 
economic compensation upon termination of a labor contract, 
the employer shall pay the unpaid compensation plus 50 
percent of the unpaid compensation.  Article 39 of the 
draft LCL sets a new minimum payment upon termination at 6 
months of salary, and lifts the current limit on 
compensation (limit: 12 months of salary) in the current 
Rules (Rules, Articles 5 and 7). By raising penalties, 
which are intended to give employers an economic incentive 
to obey the law, the draft addresses a series of problems 
identified in the December 2005 Report to the Standing 
Committee of the National People's Congress on the 
Implementation of the 1994 Labor Law.  The Report stated 
that 12.5 percent of employees surveyed in April 2005 
received wages below the local minimum wage, that 7.8 
percent of employees surveyed experienced wage arrearages 
averaging RMB 2,184 withheld for an average of 3.2 months; 
in another province where the problem was particularly 
severe, the 16.1 percent of employees have experienced wage 
arrearages, the Report said. 
 
--  Defaults by Unlicensed Companies on Wages:  Draft 
Article 61 provides that if an entity that does not have a 
business license or fails to go through other procedures 
required by law recruits workers, the labor protection 
authority shall impose a fine of from RMB 1,000-5,000 (USD 
125-625) per employee.  The draft LCL also requires that 
the party awarding a contract to an unlicensed company 
shall be liable for the wages owed by the unlicensed 
company to its employees. 
 
--  Violations by Labor Service Agencies:  Draft Article 59 
provides that a Labor Service Agent that violates the law 
shall rectify the violation upon the order of the labor 
authority.  For "serious cases" (Note: The draft does not 
define "serious case."  End Note) a fine of from RMB 1,000 
to 5,000 (USD 125-625) shall be imposed.  When an employee 
assigned by a Labor Service Agent has his/her rights and/or 
interests violated, the Labor Service Agency and the 
 
BEIJING 00009677  004 OF 008 
 
 
receiving entity shall be jointly liable for compensation. 
If a Labor Service Agent fails to deposit a reserve fund, 
the labor authority shall impose a fine of from 10 to 50 
percent of the reserve fund to be deposited.  If the Labor 
Service Agency does not pay the fine, the administrative 
authority for industry and commerce shall cancel its 
business license. 
 
--  Use by Employers of Illegal Guarantees:  Article 14 of 
the draft LCL forbids an employer from requiring an 
employee to provide any guarantee, collect any money or 
seize the ID of the employee as security.  Article 54 
provides that if an employer performs any act that violates 
Article 14, the money or property taken as a guarantee 
shall be returned to the employee and a fine of from RMB 
500-2,000 (USD 62.50-250) per employee shall be levied on 
the employer.  The Article also provides that the employer 
must compensate the employee for any loss incurred.  The 
current regulation governing this issue is Article 3 of the 
Provisions on Economic Compensation for Violating or 
Terminating the Labor Contract, effective January 1, 1995, 
which provides that the labor inspection authority may 
require any employer who fails to compensate an employee 
with overtime premium pay shall be liable for the unpaid 
amount plus an additional 25 percent of the remuneration. 
 
--  Violence, Coercion, Force Against Workers:  Draft 
Article 55 provides civil penalties of from RMB 2,000- 
20,000 (USD 250-2,500) on an employer who enters into a 
labor contract with an employee through fraud or coercion. 
Article 56 of the draft makes it a criminal offense to use 
violence, coercion or illegal restriction of personal 
freedom as a means to force an employee to work or to work 
under dangerous conditions which violate the rules and 
jeopardize personal safety.  Furthermore, Article 56 states 
that the use of insults, physical punishment, beatings and 
illegal searches or detention of an employee shall be 
investigated, and if the act constitutes an offense, shall 
be punished pursuant to the Criminal Law. 
 
--  Abuse of Authority by Labor Bureaus: Draft Article 62 
provides that labor authorities in charge of labor 
protection who exercise their authority in violation of the 
law, and infringe the rights of employers or employees, 
shall be liable for compensatory damages and for 
administrative penalties.  In addition, such officials 
shall be investigated and if their acts constitute an 
offense, shall be punished pursuant to the criminal law. 
 
But Draft Leaves Some Penalties Unchanged 
----------------------------------------- 
 
¶8. (U) The draft leaves unchanged penalties for several 
practices prohibited by the Labor Law and regulations: 
 
--  Failure by Employer to Provide a Labor Contract:  The 
draft LCL makes no change in current penalties, set forth 
in the Regulation on Economic Compensation for Violating 
Provisions Regarding Labor Contracts in the Labor Law, 
effective May 1, 1995, for failure to provide a labor 
contract.  Article 3 of the regulation provides that an 
employer shall compensate the employee for his/her loss in 
remuneration plus an additional 25 percent of the 
compensation for 1) intentionally failing to conclude a 
labor contract after hiring an employee, and for not 
renewing a labor contract when it expires; 2) for 
concluding an invalid or partially invalid labor contract; 
3) for infringing the rights of a female or underage 
employee in violation of the regulations; or 4) for 
terminating the labor contract in violation of the 
regulations. 
 
--  Failure by Employer to Pay Social Insurance 
 
BEIJING 00009677  005 OF 008 
 
 
Contributions:  Article 55 of the draft provides that if 
the employer fails to pay "other economic compensation," as 
provided by law, the labor authority can order the employer 
to pay within a specified time.  The regulation Punitive 
Measures for Violating the PRC Labor Law, effective January 
1, 1995, provides in Article 17 that an employer who fails 
to pay the Social Security contribution on behalf of the 
employee shall pay the unpaid contribution within the time 
period imposed by the labor authority plus two percent of 
any unpaid contribution that has not been paid within the 
time period imposed. 
 
--  Forced or Uncompensated Overtime:  Article 11 of the 
draft LCL provides that the contract shall include, among 
other provisions, "working hours and rest and vacations." 
Current regulations governing this issue are the Provisions 
on Economic Compensation for Violating or Terminating the 
Labor Contract, effective January 1, 1995.  Article 3 of 
the regulation provides that the labor inspection authority 
may require the employer who fails to pay overtime premium 
compensation to give the employee the unpaid amount plus an 
additional 25 percent of the remuneration.  Punitive 
Measures for Violating the Labor Law, a regulation 
effective January 1, 1995, provides in Article 4 that the 
labor inspection authority shall pay a fine of no more than 
RMB 100 per hour for forcing a worker to work extended 
hours without negotiating with the labor union.  Article 5 
of the same regulation provides for a punitive fine of not 
more than RMB 100 per person for three hours of overtime 
work per day, or over 36 hours of overtime work per month. 
The December 2005 Report to the Standing Committee of the 
NPC identifies uncompensated overtime as a common 
occurrence and that workers frequently work over 10 hours 
per day without receiving premium pay. 
 
Could Draft Nullify Portions of Inspection Regulations? 
--------------------------------------------- ---------- 
 
¶9.  (U)  Article 45 of the draft LCL gives labor inspection 
authorities the right to examine and inspect materials and 
to inspect workplaces in connection with the conclusion of 
labor contracts and collective contracts, and Article 47 of 
the draft specifies that in carrying out inspections 
officials shall enforce the law "in a civilized way."  By 
contrast, Article 15 of the Regulation on Labor Security 
Inspection, effective December 1, 2004, gives labor 
inspectors a series of powerful tools to use in enforcing 
the 1994 Labor Law, including the right to enter the work 
site to make inspections, the right to inquire of relevant 
persons about the issues, the right to compel the employer 
to produce documents and to make statements and 
explanations; the right to collect information by means of 
photocopying, photos, video recordings and other means; the 
right to engage an accounting firm to audit the company's 
payment of wages and social insurance premiums, and other 
rights.  It is unclear whether these provisions of the LCL, 
when passed by the NPC, would restrict the existing powers 
of inspectors, and thereby reduce, not increase, labor 
inspectors' ability to enforce the law. 
 
Stricter Provisions for Employers Draw Company Complaints 
--------------------------------------------- ------------ 
 
¶10.  (SBU)  The drafters also tightened certain provisions 
prohibiting employer practices regarded by some as unfair 
to workers.  The changes are opposed by some employers on 
the grounds that they are unduly burdensome. 
 
--  Non-Compete Compensation and Damages for Breach: 
Article 16 of the draft LCL requires that where a non- 
compete agreement is reached, an additional agreement 
providing for economic compensation to the employee must 
also be reached.  The article limits the scope of the 
 
BEIJING 00009677  006 OF 008 
 
 
restriction to the territory within which the company 
competes, and limits the term of the restriction to two 
years. (Note:  A 1996 notice issued by the Ministry of 
Labor and Social Security MOLSS) limits the non-compete 
period to a maximum of three years.  End Note.)  The 
Article further provides that the compensation provided to 
the employee shall be not less than the employee's annual 
wage. (Note:  Jiangsu Province, Shenzhen Special Economic 
Zone and Tianjin Municipality all have published 
regulations that establish a formula for the amount of 
employee compensation.  Jiangsu requires a payment of one 
third of the employee's annual wage, Shenzhen requires a 
payment of two thirds of annual wage, and Tianjin requires 
a payment of one half of the employee's annual wage.  End 
Note.)  Article 16 also provides that any damages for 
breach of the contract by the employee shall be not more 
than three times the amount paid by the employer as 
consideration for the non-compete agreement.  Transasia 
Lawyers, in its March 31 newsletter, says the provisions 
"provide important clarifications to the current legal 
framework of national law, which is widely felt to be 
inadequate to the task of protecting the rights and 
interests of both employers and employees in a balanced 
fashion."  The law firm newsletter notes that "Some 
employers, rather than seeking to retain key staff by 
offering competitive remuneration and benefits packages, 
attempt instead to prevent employees from leaving to join 
another employer midway during the term of their employment 
contract by insisting that they agree to an unreasonably 
broad and punitive breach of contract clause.  Such a 
clause typically requires a prohibitive amount of monetary 
compensation from the employee in the event that they 
terminate the contract prematurely, and in effect, deprives 
the employee of their lawful right to choose alternative 
employment."  However General Electric (GE) takes the 
opposite view.  In comments to the NPC, the company says 
that this provision will force companies to make the hard 
choice between paying high compensation and protecting 
trade secrets, and recommends that the draft be amended to 
provide that compensation be not less than 50 percent of 
the annual wage of the employee.  (Note:  The drafters 
appear to be setting a ceiling while companies want to set 
a high floor for such compensation.  End Note).  GE also 
recommends that the cap on compensation for breach be 
amended to make the employee liable for all economic 
damages caused by the employee's breach of the non-compete 
agreement. 
 
--  Dispatched Employees:  Article 40 of the draft LCL 
provides that the contract of an employee assigned by a 
Labor Service Agent (LSA, also known as a Labor Dispatch 
Agency) to the same company for a full two years shall be 
terminated and a new contract signed.  GE Labor Policy 
Counsel argues that corporations need a flexible workforce, 
and should not be forced to convert temporary workers into 
permanent ones. 
 
--  Probation Period:  Article 13 of the draft LCL provides 
for probationary periods not to exceed one month for non- 
technical personnel, two months for technical personnel and 
six months for senior technical and professional personnel; 
the regulation also provides that the same employer can 
have only one probation period per employee.  The December 
2005 Report to the Standing Committee of the NPC notes that 
employers abuse probation periods.  Transasia Lawyers says 
in its March 31 newsletter "Many employers continue to 
misuse the current system of probationary periods as a 
means of maximizing their profits to the detriment of their 
employees' interests.  Under current regulations, if an 
employee can be proven not to meet the criteria for a work 
position during their probationary period, the employer may 
unilaterally terminate the employment contract with 
immediate effect without having to pay severance.  To 
 
BEIJING 00009677  007 OF 008 
 
 
exploit this system to their advantage, some employers hire 
employees during peak production periods, stipulating 
relatively long probationary periods, and then terminate 
the employment contract on the day before the probationary 
period expires."  GE, on the other hand, contends that 
these probation periods are too short to allow an employer 
to judge whether an employee is qualified for the job, and 
suggest a probation period of six months.  The company also 
suggests that the regulation permit one probation period 
for each job to allow for promotions.  Under Article 21 of 
the current Labor Law, the allowable probation period is 
six months. 
 
--  Severance Pay Upon Expiration of Labor Contracts: 
Article 39 of the draft LCL provides that employers shall 
pay compensation to an employee when the employee's labor 
contract expires or terminates according to its terms. 
Currently, Article 3 of the regulation governing Economic 
Compensation for Violating Stipulations Regarding Labor 
Contracts in the Labor Law, effective May 1, 1995, states 
that when an employer does not renew a labor contract when 
it expires, he shall be liable to compensate the employee 
for his/her lost remuneration plus an additional 25 percent 
of such remuneration.  The December 2005 Report to the 
Standing Committee of the NPC on the Implementation of the 
1994 Labor Law states that the terms of most contracts are 
not longer than one year, which allows employers to 
"circumvent" legal obligations to employees.  GE argues for 
deletion of the provision, contending that it is 
inconsistent with the policy of allowing short-term 
contracts. 
 
--  Effect of Merger on Labor Contracts:  Draft Article 26 
provides that following a merger the new employer succeeds 
to the contract of the merged company's employee, or, with 
the consent of the employee, is terminated and a new 
contract concluded.  GE says the provision conflicts with 
Article 37 of the draft which provides that a labor 
contract terminates when an employer ceases business or is 
dissolved, and that the provision should be amended so that 
labor contracts in a merger are deemed to have the same 
legal effect as under Article 37. 
 
--  Making f Company Rules:  Article 5 of the draft LCL 
rovides that the employer shall adopt regulations and 
policies having a direct relation to the vital interests of 
employees through discussion and approval by the trade 
union, workers' congress or workers' representative 
assembly or by equal negotiation.  Article 51 provides that 
rules made by the unilateral decision of the employer shall 
be null and void.  In contrast, Article 4 of the 1994 Labor 
law provides that employers shall establish and improve 
their rules and regulations according to the law and ensure 
that the workers enjoy their rights and perform their 
obligations.  GE claims that making rules should be the 
right of the employer and that such rules should be deemed 
valid unless in violation of laws, regulations or 
collective contracts. 
 
Will the Labor Contract Law Improve Enforcement? 
--------------------------------------------- --- 
 
¶11.  (SBU)  Comment:  A key question is whether the LCL as 
drafted will improve the ability of provincial and local 
governments to enforce the law.  New statutory protection 
for workers without written contracts, increased penalties 
with arguably stronger deterrent effect, and clear 
regulation of entities providing temporary workers appear 
to be provisions that will help provincial and local labor 
bureaus better protect workers.  However, the draft cannot 
resolve the longstanding problems that are clearly the 
biggest barriers to improved working conditions in China: 
inadequate numbers of labor inspectors in the labor 
 
BEIJING 00009677  008 OF 008 
 
 
bureaus; the failure of local governments, wed to a 
development model premised on cheap labor and steeped in 
local protectionism, to enforce the law; and the 
unwillingness, or inability, of the central government to 
force lower levels of government to enforce the law. 
 
Randt